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- Title
Asset Encumbrance, Bank Funding, and Fragility.
- Authors
Ahnert, Toni; Anand, Kartik; Gai, Prasanna; Chapman, James
- Abstract
We model asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank's privately optimal encumbrance choice balances the benefit of expanding profitable, yet illiquid, investment funded by cheap long-term senior secured debt, against the cost of greater fragility from runs on unsecured debt. We derive testable implications about encumbrance ratios. The introduction of deposit insurance or wholesale funding guarantees induces excessive encumbrance and fragility. Limits on asset encumbrance or Pigovian taxes eliminate such risk-shifting incentives. Our results shed light on prudential policies currently being pursued in several jurisdictions. Received September 9, 2017; editorial decision July 28, 2018 by Editor Philip Strahan.
- Subjects
BANK assets; ROLLOVERS (Finance); FINANCIAL risk; ILLIQUID assets; PIGOVIAN tax
- Publication
Review of Financial Studies, 2019, Vol 32, Issue 6, p2422
- ISSN
0893-9454
- Publication type
Article
- DOI
10.1093/rfs/hhy107